Franking credits and market reactions: Evidence from the Australian convertible security market

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    Abstract

    This study investigates whether convertible preference share issues affect firm value in Australia. The literature suggests that the announcement of straight equity issues has a negative impact. However, the outcome for convertible preference share issues (CPS) remains unknown. We selected those CPS deemed to be equity-like under the 2001 tax classification framework for this study, as only such convertibles may attach franking credits to their dividends. In line with the straight equity studies, we found significant and abnormal negative returns during the announcement periods. We initially report no statistical significance between the issuing firm s available franking credit levels and market reaction. When we controlled for ownership concentration, however, we found a positive and statistical association. This is the first study to report such an association within the CPS market, suggesting that equity-like CPS resident investors may seek franking credits and so react positively to an issuing firm s level of available franking credits.
    Original languageEnglish
    Pages (from-to)1 - 19
    Number of pages19
    JournalJournal of International Financial Markets, Institutions and Money
    Volume32
    DOIs
    Publication statusPublished - 2014

    Cite this

    @article{306d2a66659c42ac8adbd6ffdf891806,
    title = "Franking credits and market reactions: Evidence from the Australian convertible security market",
    abstract = "This study investigates whether convertible preference share issues affect firm value in Australia. The literature suggests that the announcement of straight equity issues has a negative impact. However, the outcome for convertible preference share issues (CPS) remains unknown. We selected those CPS deemed to be equity-like under the 2001 tax classification framework for this study, as only such convertibles may attach franking credits to their dividends. In line with the straight equity studies, we found significant and abnormal negative returns during the announcement periods. We initially report no statistical significance between the issuing firm s available franking credit levels and market reaction. When we controlled for ownership concentration, however, we found a positive and statistical association. This is the first study to report such an association within the CPS market, suggesting that equity-like CPS resident investors may seek franking credits and so react positively to an issuing firm s level of available franking credits.",
    author = "Fenech, {Jean Pierre} and Skully, {Michael Thomas} and Xuguang Han",
    year = "2014",
    doi = "10.1016/j.intfin.2014.04.004",
    language = "English",
    volume = "32",
    pages = "1 -- 19",
    journal = "Journal of International Financial Markets, Institutions and Money",
    issn = "1042-4431",
    publisher = "Elsevier",

    }

    TY - JOUR

    T1 - Franking credits and market reactions: Evidence from the Australian convertible security market

    AU - Fenech, Jean Pierre

    AU - Skully, Michael Thomas

    AU - Han, Xuguang

    PY - 2014

    Y1 - 2014

    N2 - This study investigates whether convertible preference share issues affect firm value in Australia. The literature suggests that the announcement of straight equity issues has a negative impact. However, the outcome for convertible preference share issues (CPS) remains unknown. We selected those CPS deemed to be equity-like under the 2001 tax classification framework for this study, as only such convertibles may attach franking credits to their dividends. In line with the straight equity studies, we found significant and abnormal negative returns during the announcement periods. We initially report no statistical significance between the issuing firm s available franking credit levels and market reaction. When we controlled for ownership concentration, however, we found a positive and statistical association. This is the first study to report such an association within the CPS market, suggesting that equity-like CPS resident investors may seek franking credits and so react positively to an issuing firm s level of available franking credits.

    AB - This study investigates whether convertible preference share issues affect firm value in Australia. The literature suggests that the announcement of straight equity issues has a negative impact. However, the outcome for convertible preference share issues (CPS) remains unknown. We selected those CPS deemed to be equity-like under the 2001 tax classification framework for this study, as only such convertibles may attach franking credits to their dividends. In line with the straight equity studies, we found significant and abnormal negative returns during the announcement periods. We initially report no statistical significance between the issuing firm s available franking credit levels and market reaction. When we controlled for ownership concentration, however, we found a positive and statistical association. This is the first study to report such an association within the CPS market, suggesting that equity-like CPS resident investors may seek franking credits and so react positively to an issuing firm s level of available franking credits.

    U2 - 10.1016/j.intfin.2014.04.004

    DO - 10.1016/j.intfin.2014.04.004

    M3 - Article

    VL - 32

    SP - 1

    EP - 19

    JO - Journal of International Financial Markets, Institutions and Money

    JF - Journal of International Financial Markets, Institutions and Money

    SN - 1042-4431

    ER -